Photographer: Joshua Roberts/Bloomberg

Fed Debt-Limit Contingency Plans Detailed in 2011 Transcripts

  • Blueprint prioritized making interest and principal payments
  • Details of contingency plans had been political flash point

Federal Reserve officials assumed that the the U.S. Treasury would prioritize payments on government securities over other obligations in case the legal debt limit were breached, according to a transcript of a 2011 meeting of central bank policy makers.

U.S. central bankers were briefed in an Aug. 1, 2011, conference call on how the Treasury would handle principal and interest payments on government securities. The full details of that meeting were secret until Thursday, when the Fed released transcripts of the Federal Open Market Committee’s 2011 meetings under the customary five-year lag.

The Obama administration in 2011 and 2013 almost breached the nation’s debt limit, pushing the Fed and Treasury Department to draw up contingency plans. Republicans clashed with the administration over whether the government could prioritize debt payments to avoid violating the legal borrowing limit as GOP lawmakers refused to raise the ceiling. Treasury Secretary Jacob J. Lew has called prioritizing payments “default by another name.”

“Principal and interest on Treasury securities would continue to be made on time,” the Fed’s Louise Roseman, a Board of Governors official with oversight over payment systems, told the committee Aug. 1 during a special conference call. “Payments that were made would be settled as usual.”

Roseman “worked hard with the Treasury” and Fed staff “to develop a system for handling government payments when we thought they would be prioritized or at least not fully paid,” then-Fed Chairman Ben S. Bernanke said at the start of the meeting.

The Fed system holds Treasuries in its portfolio and processes trillions of dollars in payments, making its role integral to the issue of how the government dealt with the debt ceiling.

Functioning Market

The briefing shows that a well-functioning Treasury market was among the highest priorities for the Treasury.

“Principal on Treasury securities that are maturing would be funded by having auctions that would roll over those maturing securities into new issues,” Roseman said. “With respect to interest payments, the way the Treasury planned to ensure that it would be able to pay interest payments timely by holding back other government payments and accumulating sufficient cash balances in its Fed account to pay upcoming coupon payments.”

The secrecy around the plan angered Republicans, who accused the Obama administration of misleading the public. In a 2013 letter to Bernanke, Hatch noted that discussions of the debt ceiling within the context of an FOMC meeting, which protected it from disclosure for five years, “can hardly be regarded as monetary policy making.”

“If construed as such, Fed discussions of virtually anything could simply be delegated to an FOMC meeting and cloaked under the guise of monetary policy discussions,” Hatch said.

President Barack Obama resolved the crisis by signing the Budget Control Act of 2011 on Aug. 2. Still, the congressional wrangling was costly. The economy was battered by the downgrade of the U.S. credit rating to AA+ from AAA by Standard and Poor’s Corp. on Aug. 5 that year due to the “prolonged controversy” over raising the nation’s debt ceiling.

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